10 Main Sources of Short-Term Fund

For:
M.Com. (2nd Semester)

Prepared By:

Prof. K. S. Thakur
Jiwaji University, Gwalior
Introduction:

Short-term sources: Funds which are required for a period not exceeding
one year are called short-term sources.

The major sources of short term funds are:

1. Indigenous Bankers
2. Trade Credit
3. Installment Credit
4. Advances
5. Factoring
6. Accrued Expenses
7. Deferred Incomes
8. Commercial Paper
9. Commercial Banks
10. Public Deposits.
1. Indigenous Bankers:

Private money-leaders and other country bankers used to be the

only sources of finance prior to the establishment of commercial
banks. They used to charge very high rates of interest and exploited
the customers to the largest extent possible.

2. Trade Credit:

Trade credit refers to the credit extended by the suppliers of goods

in the normal course of business. As present day commerce is built
upon credit, the trade credit arrangement of a firm with its
suppliers is an important source of short-term finance. The credit-
worthiness of a firm and the confidence of its suppliers are the
main basis of securing trade credit.
The main advantages of trade credit as a source of short-term finance
include:
(i) It is easy and convenient method of finance.
(ii) It is flexible as the credit increases with the growth of the firm.
(iii) It is informal and spontaneous source of finance.

The biggest disadvantage of this method of finance is charging of higher prices

by the suppliers and loss of cash discount.
3. Installment Credit:

This is another method by which the assets are purchased and the
possession of goods is taken immediately but the payment is made
in Installment over a pre-determined period of time. Generally,
interest is charged on the unpaid price or it may be adjusted in the
price.

4. Advances:

Some business houses get advances from their customers and

agents against orders and this source is a short-term source of
finance for them. It is a cheap source of finance and in order to
minimise their investment in working capital, some firms having
long production cycle, especially the firms manufacturing
industrial products prefer to take advance from their customers.
5. Factoring:

Another method of raising short-term finance is through account

receivable credit offered by commercial banks and factors. A
commercial bank may provide finance by discounting the bills or
invoices of its customers. Thus, a firm gets immediate payment for
sales made on credit.

6. Accrued Expenses:

Accrued expenses are the expenses which have been incurred but not
yet due and hence not yet paid also. These simply represent a liability
that a firm has to pay for the services already received by it. The most
important items of accruals are wages and salaries, interest, and taxes.
7. Deferred Incomes:

Deferred incomes are incomes received in advance before supplying

goods or services. They represent funds received by a firm for which
it has to supply goods or services in future. These funds increase the
liquidity of a firm and constitute an important source of short-term
finance.

8. Commercial Paper:

Commercial paper represents unsecured promissory notes issued

by firms to raise short-term funds. It is an important money market
instrument in advanced countries like U.S.A. In India, the Reserve
Bank of India introduced commercial paper in the Indian money
market on the recommendations of the Working Group on Money
Market (Vaghul Committee).
9. Commercial Banks:

Commercial banks are the most important source of short-term

capital. The major portion of working capital loans are provided
by commercial banks. They provide a wide variety of loans
tailored to meet the specific requirements of a concern.

The different forms in which the banks normally provide

loans and advances are as follows:

(a) Loans
(b) Cash Credits
(c) Overdrafts, and
(d) Purchasing and discounting of bills.
10. Public Deposits:

Acceptance of fixed deposits from the public by all type of

manufacturing and non-bank financial companies in the private
sector has been a unique feature of Indian financial system. The
importance of such deposits in financing of Indian industries was
recognised as early as in 1931 by the Indian Central Banking Enquiry
Committee.
Since January 1967, the Government of India has tried to restrict the
growth of company deposits through various measures. The primary
objective of exercising control over public deposits has been to
regulate the growth of deposits outside the banking sector as well as to
provide some protection to the investors in such deposits.
But, in spite of the restrictive measures, public deposits with the non-
banking corporate sector have become a significant part of corporate
financing.